Student Loan Ombudsman at CFPB Can’t Take the BS Anymore. Quits in Scathing Letter Telling Director Mulvaney He Sucks. Essay by Steve Rhode

By Steve Rhode

Seth Frotman, an Assistant Director and Student Loan Ombudsman at the Consumer Financial Protection Bureau, told CFPB Director Mick Mulvaney to shove it and quit in an honest resignation. His experience inside the slowly gutted consumer protection agency was enough to say he’s mad as hell and not going to take it anymore.

Frotman’s resignation letter said, “It is with great regret that I tender my resignation as the Consumer Financial Protection Bureau’s Student Loan Ombudsman. It has been the honor of a lifetime to spend the past seven years working to protect American consumers; first under Holly Petraeus as the Bureau defended America’s military families from predatory lenders, for-profit colleges, and other unscrupulous businesses, and most recently leading the Bureau’s work on behalf of the 44 million Americans struggling with student loan debt. However, after 10 months under your leadership, it has become clear that consumers no longer have a strong, independent Consumer Bureau on their side.


Each year, tens of millions of student loan borrowers struggle to stay afloat. For many, the CFPB has served as a lifeline — cutting through red tape, demanding systematic reforms when borrowers are harmed, and serving as the primary financial regulator tasked with holding student loan companies accountable when they break the law.

The hard work and commitment of the immensely talented Bureau staff has had a tremendous impact on students and their families. Together, we returned more than $750 million to harmed student loan borrowers in communities across the country and halted predatory practices that targeted millions of people in pursuit of the American Dream.

The challenges of student debt affect borrowers young and old, urban and rural, in professions ranging from infantrymen to clergymen. Tackling these challenges should know no ideology or political persuasion. I had hoped to continue this critical work in partnership with you and your staff by using our authority under law to stand up for student loan borrowers trapped in a broken system. Unfortunately, under your leadership, the Bureau has abandoned the very consumers it is tasked by Congress with protecting. Instead, you have used the Bureau to serve the wishes of the most powerful financial companies in America.


As the Bureau official charged by Congress with overseeing the student loan market, I have seen how
the current actions being taken by Bureau leadership are hurting families. In recent months, the Bureau has made sweeping changes, including:

Undercutting enforcement of the law. It is clear that the current leadership of the Bureau has abandoned its duty to fairly and robustly enforce the law. The Bureau’s new political leadership has repeatedly undercut and undermined career CFPB staff working to secure relief for consumers. These actions will affect millions of student loan borrowers, including those harmed by the company that dominates this market. In addition, when the Education Department unilaterally shut the door to routine CFPB oversight of the largest student loan companies, the Bureau’s current leadership folded to political pressure. By undermining the Bureau’s own authority to oversee the student loan market, the Bureau has failed borrowers who depend on independent oversight to halt bad practices and bring accountability to the student loan industry.

Undermining the Bureau’s independence. The current leadership of the Bureau has made its priorities clear — it will protect the misguided goals of the Trump Administration to the detriment of student loan borrowers. For nearly seven years, I was proud to be part of an agency that served no party and no administration; the Consumer Bureau focused solely on doing what was right for American consumers. Unfortunately, that is no longer the case. Recently, senior leadership at the Bureau blocked efforts to call attention to the ways in which the actions of this administration will hurt families ripped off by predatory for-profit schools. Similarly, senior leadership also blocked attempts to alert the Department of Education to the far-reaching harm borrowers will face due to the Department’s unprecedented and illegal attempts to preempt state consumer laws and shield student loan companies from accountability for widespread abuses. At every turn, your political appointees have silenced warnings by those of us tasked with standing up for service members and students.

Shielding bad actors from scrutiny. The current leadership of the Bureau has turned its back on young people and their financial futures. Where we once found efficient and innovative ways to collaborate across government to protect consumers, the Bureau is now content doing the bare minimum for them while simultaneously going above and beyond to protect the interests of the biggest financial companies in America. For example, late last year, when new evidence came to light showing that the nation’s largest banks were ripping off students on campuses across the country by saddling them with legally dubious account fees, Bureau leadership suppressed the publication of a report prepared by Bureau staff. When pressed by Congress about this, you chose to leave students vulnerable to predatory practices and deny any responsibility to bring this information to light.

American families need an independent Consumer Bureau to look out for them when lenders push products they know cannot be repaid, when banks and debt collectors conspire to abuse the courts and force families out of their homes, and when student loan companies are allowed to drive millions of Americans to financial ruin with impunity.

In my time at the Bureau I have traveled across the country, meeting with consumers in over three dozen states, and with military families from over 100 military units. I have met with dozens of state law enforcement officials and, more importantly, I have heard directly from tens of thousands of individual student loan borrowers.

A common thread ties these experiences together — the American Dream under siege, told through the heart wrenching stories of individuals caught in a system rigged to favor the most powerful financial interests. For seven years, the Consumer Financial Protection Bureau fought to ensure these families received a fair shake as they as they strived for the American Dream.

Sadly, the damage you have done to the Bureau betrays these families and sacrifices the financial futures of millions of Americans in communities across the country.

For these reasons, I resign effective September 1, 2018. Although I will no longer be Student Loan Ombudsman, I remain committed to fighting on behalf of borrowers who are trapped in a broken student loan system.

Sincerely,
Seth Frotman
Assistant Director 5 Student Loan Ombudsman
Consumer Financial Protection Bureau – Source

Steve Rhode, the Get Out of Debt Guy

`*****

This essay by Steve Rhode originally appeared on August 27, 2018 at Getoutofdebtguy.org I highly recommend Mr. Rhode's blog site--a robust ongoing commentary on consumer debt issues.

Bob Hertz, Editor of New Laws for America, Has Some Good Suggestions for Solving the Student Loan Crisis

Bob Hertz, who manages a website titled New Laws for America (newlawsforamerica.blogspot/) sent me his list of legal reforms to solve the student loan crisis.

I don't agree with all of Mr. Hertz's proposal, but all are worthy of consideration. I am listing some of his suggestions:

1) Student borrowers should not be required to make payments on their student loans until they make at least $40,000.

2) No interest should accrue on student loans. In fact, interest on student loans should be abolished altogether.

3) All student debt owed by borrowers or cosigners over age 60 should be forgiven.

4) Students debtors should have access to the bankruptcy courts.

5) The following types of academic programs should be excluded from the student-loan program:

• Third-tier law schools
• MBA programs
• Graduate programs in liberal arts
• for-profit vocational schools
• loans for living expenses

Near the conclusion of Mr. Hertz's list of recommendation, he makes this trenchant observation, which I quote:

Let's quit harassing and destroying our own citizens. The Federal Reserve was rich enough to buy up billions of 'toxic assets' after the bank meltdown of 2008. We can do the same with toxic student loans, which are destructive to more individuals than subprime mortgages. You an walk away from an unaffordable house. That destroys your credit but your financial life can be rebuilt.  These student loans are forever. 

I will take this opportunity to list my own list of student-loan reforms, which are similar to Mr. Hertz's reforms, but not identical.

1. Distressed student borrowers should be able to discharge their student loans in bankruptcy like any other nonsecured consumer debt.

2) The for-profit college industry should be shut down completely.

3) The Department of Education should be forbidden from garnishing Social Security checks from elderly student-loan defaulters.

4) The Parent PLUS program, which loans money to parents of college students, should be abolished; and private lenders should be prohibited by law from requiring student debtors to obtain co-signers for their loans. In addition, all student-loan cosigners should be immediately released from any legal obligation to pay back student loans that were taken out to benefit a third party (usually the child or grandchild of the cosigner).

I have called for reforms again and again, but I take this opportunity to state them again along with the reforms proposed by Bob Hertz.

Ben Miller, where the hell ya been? Center for American Progress finally wakes up to the magnitude of student-loan crisis

Ben Miller, senior director of the Center for American Progress, reminds me of a fuddy duddy who falls asleep at a wild party in a friend's apartment.  Just as the party starts to get interesting, he nods off on a pile of party goers' coats.

 Meanwhile, the party spins out of control: fights break out, spontaneous trysts are consummated in closets and spare bedrooms, furniture is broken, lamps are shattered. When the fuddy duddy awakes, the apartment is in shambles and the police are cuffing drunken revelers and hauling them off to jail.

"Did I miss something?", the fuddy duddy asks as he rubs the sleep from his eyes.

Miller wrote an op ed essay for the New York Times on August 8 titled "The Student Debt Problem is Worse Than We Imagined?" Ya think? Where the hell have you been, Mr. Miller?  You're like the guy who went out to buy popcorn just before the steamy scene in Last Tango in Paris.

So here is what Mr. Miller said in his op essay: student loan default rates are much higher than the Department of Education reports. I hate to break it to you, Ben; but people have known that for years. Everybody knows the for-profit colleges have been hiding their default rates by pushing their former students into deferment programs to disguise the fact the suckers weren't paying on their loans.

In fact, the problem is probably worse that Miller described it in the Times. Looney and Yannelis reported in 2015 that the five-year default rate for the 2009 cohort of student borrowers was 28 percent (Table 8).  And the five year default rate for the 2009 cohort of for-profit students was 47 percent--almost double what Miller reported for the 2012 cohort--only 25 percent.

Admittedly, Miller is looking at the 2012 cohort of debtors, while Looney and Yannelis analyzed the 2009 cohort. But surely no on believes the student-loan problem got better in recent years. Everyone knows the crisis is getting worse.

Miller's analysis briefly mentions the federal push to put student borrowers in deferment plans,  but that problem is more serious than Miller intimates. In fact 6 million student borrowers are in income-based repayment plans (IBRPs) and are making payments so small their loan balances are getting larger and larger with each passing month due to accruing interest.  For all practical purposes, the IBRP participants are also in default.

But Mr. Miller can be forgiven for waking up late to smell the coffee. Perhaps Miller, like the New York Times that published his essay, was so distracted by Stormy Daniels and the Russians that he was late to notice that American higher education is going down the toilet.  And surely, we can all agree that the person pressing down on the toilet-bowl handle  is Betsy DeVos.

What happened while Center for American Progress was snoozing?

References

Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default rates. Washington, DC: Brookings Institution (2015). Accessible at: http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults

Ben Miller. The Student Debt Problem is Worse Than We Imagined. New York Times, August 8, 2018.

A quarter trillion dollars in student aid last year: And what do we have to show for it?

The Chronicle of Higher Education released its annual Almanac edition this month, stuffed full of information that professors care most about: how much money people are making in the higher-education racket.

College presidents are making out like bandits. In 2015, Fifty presidents of private colleges received at least a million dollars in total compensation. Nathan Hatch at Wake Forest was the highest paid university CEO. He made $4 million in 2015--more than twice as much as the president of Yale.

The Chronicle also documented what we already knew--the cost of going to college is in the stratosphere.  At 100 private universities, it costs a quarter of a million dollars to get an undergraduate degree (tuition, room and board). And those costs are probably underestimated. According to the Chronicle, room and board at Yale costs $15,500. But does anyone believe a person can live in New Haven, Connecticut on $15,500 a year?

On the other hand, the posted sticker price for college tuition is inflated. As the Chronicle reported, colleges are discounting freshman tuition by 50 percent. Thus, a private college that charges $36,000 a year for tuition is actually collecting only about $18,000 due to grants, scholarships and various discounts.

Who gets those tuition discounts and who pays the sticker price? Colleges give grants and aid to athletes, minority students, and applicants with good academic credentials. Only the least attractive applicants pay full price.

The Chronicle's Almanac also contains some useful information about colleges that are in financial trouble.  The U.S. Department of Education gives financial responsibility ratings to American colleges. Institutions that rate 1.0 and above are considered financially responsible; college ranking below that are considered not financially responsible.

Not surprisingly, a lot of the schools with low ratings are private colleges with religious affiliations.  Northeast Catholic College, for example, received a negative 0.4 rating, and Boston Baptist College drew a 0.8.

These scores are just another sign that the small, non-prestigious, private colleges are in big trouble, particularly schools tied to religious denominations. I wish all these little schools well, but parents are crazy if they allow their children to take out student loans to attend a small private college no one has heard of.  There is a good chance these schools will have shut down before their graduates pay off their loans.

Finally, the Chronicle reported almost a quarter of a trillion dollars  was distributed in governmental and institutional student aid during 2016-2017, including $153 billion in federal aid (loans, grants and Work-Study). That's a lot of money invested in American higher education in just one year. Does anyone think we're getting our money's worth?

Nathan Hatch, president of Wake Forest University, made $4 million in 2015

Martin v. ECMC: Iowa bankruptcy judge discharges unemployed lawyer's student loans

In Martin v.  Educational Credit Management Corporation (ECMC), decided last February, Janeese Martin obtained a bankruptcy discharge of her student-loan debt totally $230,000. Judge Thad Collin’s decision in the case is probably most significant for the rationale he articulated when he rejected ECMC’s argument that Martin should be placed in a 20- or 25-year, income-based repayment plan (IBRP) rather than given a discharge.

Citing previous decisions, Judge Collins said an IBRP is inappropriate for a 50-year-old debtor who would be 70 or 75 years old when her IBRP would come to an end. An IBRP would injure Martin’s credit rating and cause her mental and emotional hardship, the judge wrote. In addition, an IBRP could lead to a massive tax bill when Martin's plan terminated in 20 or 25 years, when she would be "in the midst" of retirement.

Janeese Martin, a 1991 law-school graduate, is unable to find a good law job

Janeese Martin graduated from University of South Dakota School of Law in 1991 and passed the South Dakota bar exam the following year. In spite of the fact that she held a law degree and a master's degree in public administration, Martin never found a good job in the field of law. 

Martin financed her undergraduate studies and two advanced degrees with student loans totally $48,817. In 1993, she consolidated her loans at an interest rate of 9 percent; and she made regular payments on those loans from 1994-1996. 

Over the years, there were times when Martin could make no payments on her student loans, but she obtained various kinds of deferments that allowed her to skip monthly payments while interest accrued on her loan balance. By 2016, when Martin and her husband filed for bankruptcy, her student-loan debt had grown to $230,000--more than four times what she borrowed.

As Judge Collins noted in his 2018 opinion, Janeese Martin was 50 years old and unemployed. Her husband Stephen was 66 years old and employed as a maintenance man and dishwasher at a local cafe. The couple supported two adult children who were studying at the University of South Dakota and had student loans of their own. The family's annual income for 2016 was $39,243, which came from three sources: Stephen's cafe job, his pension and his Social Security income.

Judge Collins reviewed Janeese's petition to discharge her student loans under the "totality of circumstances" test, which is the standard used by the Eighth Circuit Court of Appeals for determining when student loans constitute an "undue hardship" and can be discharged through bankruptcy. 

Martin's Past, Present, and Reasonably Reliable Future Financial Resources

Judge Collins surveyed Martin's employment history since she completed law school. In addition to three years working for a legal aid clinic, Martin had worked eight years with the Taxpayer's Research Council, a nonprofit agency located in Iowa.  Her maximum salary in that job had paid only $31,000, and Martin was forced to give up her job in 2008 when her family moved to South Dakota.

ECMC, which intervened in Martin's suit as a creditor, argued that Martin had only made "half-hearted" efforts to find employment, but Judge Collins disagreed. Martin "testified very credibly that she wants to work and has applied for hundreds of jobs," Judge Collins wrote. Nevertheless, in the nine years since her last job, Martin had only received a few interviews and no job offers. 

Judge Collins acknowledged that Martin had two advanced degrees, but neither had been acquired recently. In spite of her diligent efforts to find employment, the judge wrote, she was unlikely to find a job in the legal field that would give her sufficient income to make significant payments on her student loan.

Martin's Reasonable and Necessary Living Expenses

Judge Collins itemized the Martin family's monthly expenses, which totaled about $3,500 a month. These expenses were reasonable, the judge concluded, and slightly exceeded the family's monthly income. Virtually all expenses "go toward food, shelter, clothing, medical treatment, and other expenses reasonably necessary to maintain a minimal standard of living," Judge Collins ruled, and "weigh in favor of discharge" (p. 893).

Other Relevant Facts and Circumstances

ECMC argued, as it nearly always does in student-loan bankruptcy cases, that Martin should be placed in a 20- or 25-year income-based repayment plan rather than given a bankruptcy discharge. The Martin family's income was so low, ECMC pointed out, that Martin's monthly payments would be zero. 

Judge Collins' rejected ECMC's arguments, citing two recent federal court opinions: the 2015 Abney decision, and Judge Collins' own 2016 decision in Fern v. FedLoan Servicing. “When considering income-based repayment plans under § 523(a)(8),” Judge Collins wrote, “the Court must be mindful of both the likelihood of a debtor making significant payment under the income-based repayment plan, and also of the additional hardships which may be imposed by these programs” (p. 894, internal punctuation omitted).

These hardships, Judge Collins noted, include the effect on the debtor’s ability to obtain credit in the future, the mental and emotional impact of allowing the size of the debt to grow under an IBRP, and “the likely tax consequences to the debtor when the debt is ultimately canceled” (p. 894, internal citation and punctuation omitted).

In Judge Collins’ view, an IBRP was simply inappropriate for Janeese Martin, who was 50 years old:

If she were to sign up for an IBRP, she would be 70 or 75 when her debt was ultimately canceled. The tax liability could wipe out all of [Martin’s] assets not as she is approaching retirement, but as she is in the midst of it. If [Martin] enters an IBRP, not only would she have the stress of her debt continuing to grow, but she would have to live with the knowledge that any assets she manages to save could very well be wiped out when she is in her 70s. (p. 894)

Conclusion

Martin v. ECMC is at least the fourth federal court opinion which has considered the emotional and mental stress that IBRPs inflict on student-loan debtors who are forced into long-term repayment plans that cause their total indebtedness to grow. Together, Judge Collins' Martin decision, Abney v. U.S. Department of Education, Fern v. FedLoan Servicing, and Halverson v. U.S. Department of Education irrefutably argue that the harm IBRPs inflict on distressed student debtors outweighs any benefit the federal government might receive by forcing Americans to pay on student loans for 20 or even 25 years--loans that almost certainly will never be paid off.

References

Abney v. U.S. Department of Education, 540 B.R. 681 (Bankr. W.D. Mo. 2015).

Fern v. FedLoan Servicing, 553 B.R. 362 (Bankr. N.D. Iowa 2016), aff'd, 563 B.R. 1 (8th Cir. B.A.P. 2017).

Fern v. FedLoan Servicing, 563 B.R. 1 (8th Cir. B.A.P. 2017).

Halverson v. U.S. Department of Education, 401 B.R. 378 (Bankr. D. Minn. 2009).

Martin v. Great Lakes Higher Education Group and Educational Credit Management Corporation (In re Martin), 584 B.R. 886 (Bankr. N.D. Iowa 2018).

"Broken and at risk of collapsing": Sandy Baum's excellent recommendations for reforming DOE's income-based student-loan repayment system

Sandy Baum published a short essay yesterday in Chronicle of Higher Education titled "Don't Get Rid of the Income-Based Loan Repayment System. Fix It."  As she said in her essay, the federal student-loan repayment system as it now stands is "broken and at risk of collapsing."

I have a few reservations about Ms. Baum's recommendations (which I will address later), but on the whole her suggestions for reform make sense.

"Create one income-driven repayment plan with clear requirements and provisions." 

As Ms. Baum attests, the Department of Education currently administers a "hodgepodge of repayment programs": PAYE, REPAYE, Public Service Loan Forgiveness (PSLF), etc.  She recommends one plan for everyone with borrowers paying a higher percentage of their income than the 10 percent rate that currently applies to borrowers in PAYE and REPAYE plans.

Baum also recommends that student borrowers be automatically enrolled in an income-based repayment plan just as soon as their repayment obligations begin. In addition, she endorses having student-loan payments added as a payroll deduction to student borrowers' paychecks.

This is a good idea. As Baum pointed out, "[p]ayroll deductions for student-loan payments would make it easier for required payments to adjust quickly when financial circumstances change, and also make it easier for students to meet their payment responsibilities."

More than that, automatic payroll deductions would make it impossible to default on student loans and eliminate the need for student borrowers to obtain economic hardship deferments. If the payroll deduction reform were implemented, it would be put the student-loan servicers out of business. No more 25 percent penalties slapped on loan defaulters; no more interest accruing on loans that are in deferment, no more robocalls from the debt collectors.

"As the total amount borrowed increases, extend the number of payments required to reach loan forgiveness."

Baum argues for longer repayment periods for people who acquired a lot of student debt. And this too makes sense. People who borrowed $20,000 or $30,000 to attend college should have a repayment plan that allows them to be debt free after 10 or 15 years.  But a person who borrows $100,000 or more should expect to make payments for a longer period of time.

"Place reasonable limits on graduate students' federal borrowing."

Student-loan debt is spinning out of control, partly fueled by the GRAD PLUS program that allows people to borrow the entire cost of going to graduate school regardless of the amount. In response to that incentive, universities raised the cost of their graduate programs exponentially--and I mean exponentially. As I have said before, I paid $1,000 a year to attend University of Texas School of Law. The current cost is $35,000 a year--35 times as much as I paid.

Not long ago, I wrote about Mike Meru, who borrowed $600,000 to go to dentistry school. With accrued interest, he now owes $1 million! A cap on the amount a student can borrow to go to graduate school would stop the insane escalation in professional-school tuition.

"Eliminate taxes on all forgiven loan balances.

The IRS considers a forgiven loan to be taxable income. Thus, with the exception of borrowers in PSLF plans, borrowers whose loan balances are forgiven under income-based repayment plans receive a tax bill for the amount of forgiven debt .

This is crazy. I doubt anyone in Congress supports the status quo on this issue. After all, what is the point of people enrolling in income-based repayment plans if they get hit with a big tax bill after faithfully making monthly loan payments for 20 or 25 years?

Baum's other good ideas

In addition to the recommendations she made this week in Chronicle of Higher Education, Baum wrote a book on the student loan program in which she endorsed easier accessibility to the bankruptcy courts for distressed student borrowers. She also supports an end to garnishing Social Security checks of elderly student loan defaulters.

I once opposed all income-based repayment plans on the grounds that they basically turn student debtors into indentured servants--forced to pay a portion of their wages to the federal government for the majority of their working lives simply for the privilege of going to college. I still believe that.

Nevertheless, Baum's proposals address reality--which is that 45 million student debtors now carry $1.5 trillion in student-loan debt.  The proposals Baum put forward this week in Chronicle of Higher Education won't fix this train wreck of the federal student-loan program, but they will make the system more humane.

References

Sandy Baum. Don't Get Rid of the Income-Based Loan Repayment System. Fix It. Chronicle of Higher Education, July 30, 2018.

Sandy Baum. Student Debt: Rhetoric and Realities of Higher Education Financing. New York: Palgrave-MacMillan, 2016.

Jason Delisle. The coming Public Service Loan Forgiveness bonanza. Brookings Institution Report, Vol 2(2), September 22, 2016.

A Deep Dive Into the Debtor Blaming 2018 Borrower Defense to Repayment Regulations. Essay by Steve Rhode

By Steve Rhode (originally posted on July 25, 2018)

Today the Department of Education (ED) has released their new rules for the program so let’s jump in and see what the Borrower Defence to Repayment program now looks like. I’m going to read the 433 pages so you don’t have to.The Department of Education put a hold on forgiving federal student loans for students who were victims of fraud by the schools that enrolled them. Under the Obama administration, the program would suspend collections activity while claims were being investigated and total forgiveness was a possible outcome.

Under the Trump administration claims were not approved and the rules were changed to only allow a partial forgiveness for most debtors based on an impractical standard.

It appears ED is trying to shift the responsibility for making good decisions for enrolling in questionable schools by pushing that obligation and blame on the student. The new rules say, “The goal of the Department is to enable students to make informed decisions on the front end of college enrollment, rather than to grant them financial remedies after-the-fact when lost time cannot be recouped and new educational opportunities may be sparse. Postsecondary students are adults who can be reasonably expected to make informed decisions and who must take personal accountability for the decisions they make.”

While ED says educational institutions should not mislead the students and “remedies should be provided to a student when misrepresentation on the part of an institution causes financial harm to that student,” let’s see how much power and practicality those remedies have.

The ED again turns back to putting the responsibility and blame on the student for enrolling in the wrong school that may have misled them. ED says, “students have a responsibility when enrolling at an institution or taking student loans to be sure they have explored their options carefully and weighed the available information to make an informed choice.”

But what seems to be missing from that lofty goal is some sort of pre-screening by the school to review the cost of the education and the expected salary for the chosen field. For example, the other day I wrote about the $90,000 associates degree in web design. Does the school have a responsibility to sell a fair product or is the responsibility now focused on the student for believing the hype?

ED says, “The Department has an obligation to enforce the Master Promissory Note, which makes clear that students are not relieved of their repayment obligations if later they regret the choices they made.” So if your 18-year-old self made a bad choice of schools that provided an overpriced education with little value, that’s your own damn fault.

The proposed rule document says, “As of January 2018, it had received 138,989 claims, of which 23 percent had been processed.” Some of these claims go back more than a year.

It is quite possible those became a major issue with the new ED because Borrower Defense Claims were being submitted and approved. These claims were not approved on no basis but because students had been misled or deceived by the school.

But here is where ED is turning the table on debtors, “the Department is concerned that several features of the 2016 final regulations might have put the Department in the untenable position of forgiving billions of dollars of Federal student loans based on potentially unfounded accusations. Specifically, those regulations would allow the Department to afford relief to borrowers without providing an opportunity for institutions to adequately tell their side of the story.”

These new rules say, students who feel they were misled and deceived by schools to get them to enroll and take out federal student loans, may still submit claims but as long as they are “not in a collections status.” So students who were saddled with questionable loans by a questionable school will have to continue to make monthly payments or stay out of collections while their claim is processed for an undetermined amount of time.

ED wants to encourage students to enroll in income-driven repayment plans and make payments on their loans. These would be the same plans that put people into decades-long repayment plans with potentially big tax bills at the end. Balances in these programs go up, not down, as the monthly payment is insufficient to cover the interest building.

ED is worried that students claiming they were harmed by their schools will strategically default on their otherwise unaffordable debt. As evidence to support this concern, ED cites research by those who intentionally defaulted on their mortgage payments to take advantage of mortgage modifications. Talk about apples and oranges here.

“The Department is trying very carefully to balance relief for borrowers who have been harmed by acts of institutional wrongdoing, with its obligation to the taxpayer to provide reliable stewardship of Federal dollars.” And while that might be true, then why isn’t the Department limiting access to federal funds by schools that engage in questionable practices?

Those questionable practices have led to massive amounts of unaffordable student loan debt sitting in a non-payment status. The lack of oversight by ED to rein in the access to federal student loan dollars by typically for-profit schools who have been approved by questionable accreditation.

So ED says, “With more than a trillion dollars in outstanding student loans, the Department must uphold its fiduciary responsibilities and exercise caution in forgiving student loans to ensure that it does not create an existential threat to a program that lacks typical credit and underwriting standards.”

But where were the underwriting standards for schools selling degrees that students would never be able to afford to repay? Where was the fiduciary responsibility for ED and student loan debtors?

ED appears to say they are not going to get involved in resolving disputes or claims of wrongdoing against schools. That is going to be left up to the individual student to fight with the school through the courts. How students will be able to afford to do that, is a mystery.

And ED is not going to block schools from forcing students into secret arbitration or stopping schools from allowing students to enter class action suits against the schools. Instead, ED says in its press release on the rulemaking “that institutions requiring students to engage in mandatory arbitration or prohibiting them from participating in class action lawsuits provide plain language explanations of these provisions to enable students to make an informed enrollment decision.” So students who decide to go to schools that block access to courts to remedy claims were stupid to enroll.

Here is what the rule says, “it seems reasonable that consumer complaints should continue to be adjudicated through existing legal channels that put experienced judges or arbitrators in the position of weighing the evidence and rendering an impartial decision.”

Even with the Borrower Defense to Repayment program in place, ED again takes the step to say the student was the idiot in this situation when they enrolled at a school they believed. ED says, “As stated in the Master Promissory Note the borrower signs when initiating their first loan, the borrower is expected to repay the loan even if the borrower fails to complete the program or is dissatisfied with the institution or his or her outcomes.”

On the issue of a group discharge of federal student loans if a school is found to have engaged in “a misrepresentation made with knowledge of its false, misleading, or deceptive nature or with a reckless disregard for the truth,” ED punts and says that will be the focus of a different rule. This appears to close the door for bulk discharges of schools found guilty of deception, like in the Corinthian Colleges case.

As evidence why the group discharge would be harmful to students, ED says “Because an institution can refuse to provide an official transcript for a borrower whose loan has been forgiven, group discharges could render some borrowers unable to verify their credentials or work in the field for which they trained and have enjoyed employment.” Maybe the real answer is that is a school was found to deceive students they should still have to provide a transcript.

In the past, schools who enrolled students who never graduated from high school or had a GED could be found to have taken advantage of people who may not have been qualified to enroll in higher education. The proposed rule shifts the burden back to the uneducated student when it says, “We also propose changes to the Department’s current false certification regulations. The Department believes that in cases when the borrower is unable to obtain an official transcript or diploma from the high school, postsecondary institutions should be able to rely on an attestation from a borrower that the borrower earned a high school diploma since the Department relies on a similar attestation in processing a student’s Free Application for Federal Student Aid (FAFSA).”

Where is the underwriting in this process that ED says it engages in?

These new rules would apply to federal student loans first disbursed on or after July 1, 2019.

They would also “require a borrower to sign an attestation to ensure that financial harm is not the result of the borrower’s workplace performance, disqualification for a job for reasons unrelated to the education received, a personal decision to work less than full-time or not at all, or the borrower’s decision to change careers.”

Feel free to read the entire document, here.

My impression of the proposed new rules is the Department of Education wants to shift all the responsibility for falling for school marketing overpriced education to the least informed person in this transaction, the student.

It doesn’t take a crystal ball to see how this is going to work out. Badly for debtors.

If ED is worried about underwriting and a fiduciary responsibility then why are they passing out easy loans with little regard to affordability, to begin with? Does the government have a duty to protect it’s citizens or does it need to protect its poor financial decision making and schools they pump loans through? Or is this new policy all about blaming the victim instead of investigating the claims for validity?

Steve's essay was originally posted on The Get Out of Debt Guy web site.

*****

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here. 

Divorce, birth rates and home ownership: All are negatively affected by crushing student-loan debt

According to Student Loan Hero, about 1 out 8 divorcees queried in a recent survey said that the student loans they took out before getting married eventually led to their divorce.  And the survey also found that more than a third of couples with student debt delayed their divorce because they couldn't afford the expense.

Apparently, student loans are now such a significant marital problem that one New York attorney recommends couples sign a prenuptial agreement specifying that the person helping to pay off the spouse's student loans gets reimbursed in case of a divorce. How romantic!

Experts have long agreed that money problems put a strain on marriages, but student loans are a particularly nasty form of debt. No wonder so many divorcees cited student loans specifically as a major cause of their marital split. Unlike car loans, credit card debt and home mortgages, student-loan debt is almost impossible to discharge in bankruptcy. Moreover, student-loan borrowers have huge penalties slapped on their college-loan debt if they default--25 percent of the amount owed, including unpaid interest.

The Student Loan Hero survey is only the most recent evidence of the pain Americans are suffering from student loans. Earlier this month, the New York Times reported that Americans are having fewer babies; and college loans are one of the reasons.

The Times conducted a survey of men and women in the 20-to-45 age group, and almost two thirds said they planned to have fewer children than their ideal because of financial concerns.  Among people who said they planned to have no children, 13 percent cited student debt.

And the Federal Reserve Bank of New York documented last year that student debt was negatively affecting the housing market. A 2017 Federal Reserve Bank report observed that home ownership among young people declined by 8 percent over an 8-year period (2007 to 2015);  and the Feds concluded that a substantial reason for this decline is rising levels of student-loan debt.

The Fed report also observed that more young Americans are living with their parents than in previous years. In 2004, about one third of 23-25-year-olds lived with their parents. In 2015, 45 percent of people in this age bracket were living with mom and dad--a big increase.

None of this bad news should be surprising as Americans borrow more and more money to go to college. In 2002, only 20 percent of student borrowers owed $20,000 or more. Last year, 40 percent of student debtors owed that much or more. And borrowers owing $50,000 or more jumped from 5 percent to 16 percent during the same time period.

Remarkably, almost no one in the higher education industry even acknowledges a problem with soaring student-loan debt. If there is a problem, the industry flacks tell us, the easy solution is extended repayment terms. Simply force Americans to pay back their loans over 20 years or even 25 years, university insiders insist.

Do you suppose Betsy DeVos thinks about distressed student borrowers when she sips her martinis on her $40 million yacht, the Seaquest? I doubt it. Based on the way she's running the Department of Education, my guess is that she worries more about protecting the predatory for-profit colleges than the students who got swindled by them.

And who do you suppose Betsy is more likely to invite for drinks on the Seaquest--a single mom who defaulted on a loan she took out to attend the University of Phoenix or an equity-fund manager who owns part of the University of Phoenix?

Betsy DeVos's $40 million yacht--193 feet long!

References

Moriah Balingit. Someone untied Betsy DeVos's yacht in Ohio. Damage Ensued. Washington Post, July 26, 2018.

Jessica Dickler. 1 in 8 divorces is caused by student loans. CNBC.com., July 27, 2018.

Ben Luthi. Survey: Student Loan Borrowers Wait Longer and Pay More to Get Divorced. Student Debt Hero, July 24, 2018.

Claire Cain Miller. Americans Are Having Fewer Babies. They Told Us Why. New York Times, July 5, 2018.

Rick Seltzer. Percentage of Borrowers Owing $20,000 or More Doubled Since 2002. Inside Higher Ed, August 17, 2017.

Zachary Bleemer, et al. Echoes of Rising Tuition in Students' Borrowing, Educational Attainment, and Homeownership in Post-Recession America. Federal Reserve Bank of New York Staff Report No. 820, July 2017.

Steve Rhode. Student Loan Debt Hurts Economy, Consumers, and Retirement Savings. Personal Finance Syndication Network, September 2017.

Betsy DeVos, the for-profit college industry's best pal, rolls back regulatory protections for students who were defrauded by for-profit colleges

This week, Betsy DeVos, President Trump's lamentable Secretary of Education, proposed new rules for implementing the Department of Education's Borrower Defense to Repayment Program.

The new rules--433 pages long--outline the DeVos regime's procedures for processing fraud claims filed by students who took out federal loans to attend for-profit colleges and were swindled.  The New York Times and Steve Rhode of Get Out of Debt Guy reported on this development, but Rhode's analysis is more comprehensive and insightful than the Times story. Rhode's essay is the one to read.

Millions of Americans have been defrauded by for-profit colleges--literally millions. Corinthian Colleges and ITT Tech filed for bankruptcy, brought down by regulatory pressures and fraud allegations. Those two institutions alone had a half million former students.

Globe University and Minnesota School of Business both lost their authority to operate in Minnesota after a Minnesota trial court ruled they had misrepresented their criminal justice programs.  Last month, the Minnesota Court of Appeals partially upheld the trial court's judgment, finding sufficient evidence to support a fraud verdict on behalf of 15 former students who testified at trial.

In California, DeVry University agreed to pay $100 million to settle claims brought by the Federal Trade Commission that it had advertised its programs deceptively. In the wake of that scandal, the company owning DeVry changed its name from DeVry Education Group to Adtalem Global Education.

The Art Institute, which charged students as much as $90,000 for a two-year associates' degree,
agreed to pay $95 million to settle fraud claims brought against it by the Justice Department, but the settlement is paltry compared to the amount of money borrowed by 80,000 former students.  And there have been numerous small for-profits that have been found liable for fraud, misrepresentation, or operating shoddy programs.

The for-profit scandal is a huge mess. If every student who was defrauded or victimized in some way by a for-profit college were to receive monetary restitution, it would probably cost taxpayers a half trillion dollars.

So how do we fix this problem? The Obama Administration approved rules that would have streamlined the process for resolving student-fraud claims, but Betsy DeVos pulled back those rules just before they were to have been implemented.

The new DeVos rules, summarized by Steve Rhode, put most of the blame on students for enrolling in these fraudulent and deceptive for-profit colleges. According to DeVos' DOE, "students have a responsibility when enrolling at an institution or taking student loans to be sure they have explored their options carefully and weighed the available information to make an informed choice."

DeVos' janky new rules forces fraud victims to continue paying on their student loans while they process their damned-near hopeless fraud claims, while DOE processes those claims--if at all--at a snail's pace.

DeVos nixed the Obama administration's ban against mandatory arbitration clauses that the for-profits have forced students to sign as a condition of enrollment. Sometimes these clauses also bar class action suits. So under Betsy DeVos' administration, many defrauded students will be barred from suing the institutions that cheated them.

Betsy and her for-profit cronies want struggling student debtors to enroll in long-term income-based repayment plans (IBRPs) that last from 20 to 25 years. Payments under those plans are generally so low that student debtors' loan balances are negatively amortizing. Borrowers in IBRPs will see their loan balances go up month by month even if they make regular monthly payments. In other words, most IBRP participants will never pay off their loans.

Some people are predicting the student-loan scandal will eventually lead to a national economic crisis similar to the one triggered by the home-mortgages meltdown. I am beginning to think these doomsday predictors are right. Already we see that student loans have impacted home ownership and may even be a factor in the nation's declining birth rates--now so low that the American population is not replacing itself.

Two things must be done to destroy the for-profit college cancer that is destroying the hopes of millions for a decent, middle-class life:

1) First, the for-profit college industry must be shut down. No more University of Phoenixes, no more DeVrys, no more Florida Coastal Universities.

2) Second, everyone who was swindled by a for-profit school should have easy access to the bankruptcy courts, so they can shed the debt they acquired due to fraud or misrepresentations and get a fresh start in life.

And there is a third thing we need to do. Congress should impeach Betsy DeVos for reckless dereliction of duty and blatant misconduct against the public interest.  Let's send her back to Michigan, where she can enjoy her family fortune as a private citizen and not as a so-called public servant.

References

Mark Brunswick. Globe U and Minn. School of Business must close, state says after fraud ruling. Star Tribune, September 9, 2016. 

Christopher Magan. Globe U. and Minnesota School of Business to start closing campuses. Twin Cities Pioneer Press, December 21, 2016.

State of Minnesota v. Minnesota School of Business, A17-1740, 2018 Minn. App. LEXIS 277 (Minn. Ct. App. June 4, 2018).

Sarah Cascone, Debt-Ridden Students Claim For-Profit Art Institutes Defrauded Them With Predatory Lending Practices.  Artnet.com, July 23, 2018.

Erica L. Green. DeVos Proposes to Curtail Debt Relief for Defrauded Students. New York Times, July 5, 2018.

Claire Cain Miller. Americans Are Having Fewer Babies. They Told Us Why. New York Times, July 5, 2018.

Steve Rhode. A Deep Dive Into the Debtor Blaming 2018 Borrower Defense to Repayment Program. Get Out of Debt Guy (blog), July 25, 2018.

Reuters. DeVry University agrees to $100 million settlement with U.S. FTC. Reuters,  December 15, 2016.

Minnesota Court of Appeals upholds fraud verdict against Minnesota School of Business and Globe University

Last month, the Minnesota Court of Appeals upheld a fraud verdict against Minnesota School of Business (MSB) and Globe University (Globe). This is the latest setback for MSB, which has experienced several regulatory and litigation woes in recent years.

2018: MSB/Globe University Lose a Fraud Suit in Minnesota Court of Appeals

In 2014, the  Minnesota Attorney General’s Office sued MSB and its sister school, Globe University, accusing the two schools of violating the Minnesota Consumer Fraud Act and the Uniform Deceptive Trade Practices Act. According to the Minnesota AG Lori Swanson, MSB/Globe  mislead prospective students to believe that the schools' four-year criminal-justice program would lead to a becoming police officer and that it's two-year criminal-justice program would lead to becoming a probation officer.

These programs were expensive, ranging from $39,000 to $78,000. As the Minnesota Attorney General's Office said in its recent press release, "As a result of the schools’ misrepresentations, many students were saddled with large amounts of student loan debt without the ability after graduation to obtain a job in their chosen career field of serving Minnesota’s citizens as police and probation officers."

After a 17-day trial, a Minnesota trial court ordered restitution for 15 students who testified they had been defrauded and approved a restitution program that would enable other students to file fraud claims as well. Under the trial court's order, these claimants "would receive a rebuttable presumption of harm and causation."

MSB and Global appealed this ruling, and last month, the Minnesota Court of Appeals approved part of the trial court's judgment but not all of it. The appellate court ruled that the 15 testifying students had adequately proved their injuries and causation under the Minnesota Consumer Fraud Act. Therefore the trial judge's restitution order for these 15 students was upheld.

On the other hand, the appellate court ruled that the state had not satisfied its burden of showing a causal nexus between MSB/Globe's representations and injury to students who had not testified at trial. Therefore, the trial court's restitution plan for other students was not approved by the appellate court.

2017: Minnesota Supreme Court rules MSB loaned student money at usurious interest rates 

Last month’s decision by the Minnesota Court of Appeals is MSB’s latest litigation setback. Last year, after a long, drawn-out lawsuit brought by the Minnesota Attorney General's Office, the Minnesota Supreme Court ruled that MSB had charged its students usurious interest rates and had loaned students money without having a valid lender's license.

According to the Minnesota Supreme Court, MSB had loaned students money at interest rates ranging from 14 to 18 percent. The students never saw this money; it went directly to the school to pay students' tuition and fees.

Minnesota has a usury law that caps interest rates at 8 percent unless the lender offers an open-end  credit plan. MSB had not loaned students money pursuant to an open-end credit plan, the Minnesota Supreme Court ruled; therefore its interest rates were usurious under state law. In addition, the court concluded, MSB was in the business of making loans and had loaned money to its students without having the required state license.

2016: MSB/Globe's Fraud Ruling Led Minnesota to Revoke MSB/Globe’s Authority to Operate

In September 2016, in the wake of the trial court's fraud ruling against MSB, Larry Pogemiller, Minnesota Commissioner of Higher Education, revoked MSB/Globe's authorization to operate in the state of Minnesota.   Last month's ruling by the Minnesota Court of Appeals, partly affirming the trial judge's fraud decision, would seem to vindicate Pogemiller's decision.

And then there was more bad news for MSB/Globe. In December 2016, The U.S. Department of Education revoked the two school's access to federal student-aid money, which provided the bulk of the schools' operating revenues.

Globe University Continues to Survive in Wisconsin

One might think that all this litigation and regulatory pressure would cause MSB and Globe to shut down completely; but--like a Timex watch, Globe University, at least, has kept on ticking. Broadview University, another for-profit school owned by the same people who own Globe and MSB, has purchased four Globe campuses in Wisconsin, and this purchase was approved by the Trump administration's Department of Education.

Jeanne Herrmann, Broadview's CEO, said claims against MSB/Globe were unfounded. “Whatever one may think of the motivations of the litigation in Minnesota, that state-specific allegation had and continues to have nothing to do with the school’s campuses outside of Minnesota, " Herrmann said in a written statement (as reported by Inside Higher Ed).

We'll Always Have Wisconsin!

So if you are a student who liked how you were treated in Minnesota by MSB or Globe, simply move to Wisconsin, where you can enroll at Broadview University, which is owned by the same nice folks who own MSB and Globe.  I’ll bet your credits will transfer, and you will enjoy the same friendly and professional service in Wisconsin that you got in Minnesota. You Betcha!

 References

Mark Brunswick. Globe U and Minn. School of Business must close, state says after fraud ruling. Star Tribune, September 9, 2016. 

Paul Fain. A Shuttered For-Profit Re-emerges. Inside Higher Education, August 9, 2017.

Christopher Magan. Globe U. and Minnesota School of Business to start closing campuses. Twin Cities Pioneer Press, December 21, 2016.

State of Minnesota v. Minnesota School of Business, A17-1740, 2018 Minn. App. LEXIS 277 (Minn. Ct. App. June 4, 2018).

State of Minnesota v. Minnesota School of Business, 899 N.W. 467 (Minn. 2017).

U.S. Department of Education. Globe University, Minnesota School of Business Denied Access to Federal Student Aid Dollars. U.S. Department of Education press release, December 6, 2016.

Schatz v. U.S. Department of Education: A 64-year-old student-loan debtor is denied bankruptcy relief because she has equity in her home

Audrey Eve Schatz, a 64-year-old single woman, attempted to discharge $110,000 in student-loans through bankruptcy, but Judge Elizabeth Katz, a Massachusetts bankruptcy judge, refused to give Ms. Schatz a discharge. Why?  Because Schatz had enough equity in her home to pay off all her student loans.

This is Ms. Schatz's sad story as laid out in Judge Katz's opinion.

Schatz graduated from the University of Massachusetts in 1977 with a bachelor's degree in psychology. Over the years, she held a variety of low-skill jobs: repairing used clothing, selling items at flea markets, working part-time for a school district, etc.  As Judge Katz acknowledged, none of these jobs were lucrative; and more than 25 years after completing her bachelor's degree, Schatz decided to go to law school.

Schatz studied law at Western New England College School of Law, a bottom-tier law school; and she took out student loans to finance her studies. She graduated with a J.D. degree in 2009, but she failed to find a high-paying job. According to the court, Schatz's net income after graduating from law school never exceeded $15,000.

The U.S. Department opposed Schatz's petition for relief on three grounds:

First, DOE argued that Schatz had not "maximized her skills to increase her earning potential." And in fact, Schatz worked as a volunteer at the Berkshire Center for Justice, a legal aid center she had founded while in law school. But Schatz explained she was working as a volunteer to gain experience as a lawyer while she looked for a paying job; and it seems unlikely she would have worked for free if she had been offered a good attorney's job.

Second, DOE argued that Schatz had not substantiated her claim that health issues hindered her job prospects. DOE said she should have called a medical doctor to testify about her health.

Finally, DOE pointed out that Schatz had equity in her home--enough equity, in fact, to completely pay off her six-figure student-loan debt.

Judge Katz  found DOE's last argument persuasive. By the judge's calculation, Schatz had at least $125,000 of equity in her home, more than enough to cover her student-loan debt.  According to Judge Katz, Schatz could sell her home, pay off her student loans, and still be able to maintain "a minimal standard of living." In Judge Katz's view, the burden was on Schatz to produce evidence that the home she lived in was necessary to maintain "a minimal standard of living," and that no alternative housing was available at a price similar to her current mortgage payment.

Given the facts of Audrey Schatz's financial circumstances, which Judge Katz verified in her opinion, I found the judge's decision to be shockingly callous.  Schatz is 64 years old--near the end of her working life. As Judge Katz noted in her opinion, Schatz had never made more than a modest wage even after she graduated from law school.

Moreover, Schatz testified at trial that she expected to get a Social Security check of less than $900 a month and that her retirement account contained only $1,800. And Judge Katz wants Ms. Schatz to sell her house!

The Schatz case illustrates just how much depends on the personal qualities of the bankruptcy judge who hears student-loan bankruptcy cases. Remember Judge Frank Bailey, another Massachusetts bankruptcy judge who decided a student-loan case earlier this year?

Judge Bailey expressed frustration with the traditional tests bankruptcy judges are using in student-loan cases: the Brunner test and the "totality-of-circumstances" test. "I pause to observe that both tests for 'undue hardship' are flawed," he wrote. In Judge Bailey's view, "[t]hese hard-hearted tests have no place in our bankruptcy system."

Judge Bailey then went on to articulate a more reasonable standard for determining when a debtor's student loans should be discharged in bankruptcy.  "If a debtor has suffered a personal, medical, or financial loss and cannot hope to pay now or in the reasonably reliable future," the judge reasoned, "that should be enough."

Unfortunately for Audrey Schatz, her bankruptcy case was assigned to Judge Elizabeth Katz and not Judge Frank Bailey. Had Judge Bailey been her judge, Ms. Schatz might have discharged her six-figure student-loan debt and kept her house. Surely this would have been some comfort to her when she enters old age and begins living on a Social Security check of $856.

References

Schatz v. U.S. Department of Education, 584 B.R. 1 (Bankr. D. Mass. 2018).

Smith v. U.S. Department of Education (In Re Smith), 582 B.R. 556 (Bankr. D. Mass 2018).

Mock v. National Collegiate Student Loan Trust: A peek into the shady world of the private student-loan market

In 2007, Casondra Mock, a Texas resident, borrowed about $20,000 from Union Federal Savings Bank, a Rhode Island institution, to finance her studies at the University of Houston at Clear Lake.  The interest rate was high--almost 14 percent.

Under the terms of the loan, Mock would begin paying  $339 a month beginning in December 2009 and would continue making monthly payments for 20 years.  Had she completed all the payments, she would have paid $81,000--4 times what she borrowed.

The Rhode Island bank packaged Mock's loan into a pool of loans, and sold the pool to National Collegiate Funding, which then sold the pool to a "purchaser trust."  Private student loans that are pooled and sold in this way are sometimes called SLABS--Student Loan Asset Backed Securities.

SLABS are very similar to the home mortgages that were pooled and sold to investors ten years ago. Those pooled mortgages were called ABS--Asset Backed Securities. If you watched the movie The Big Short, you know these ABS were sold to investors as AAA rated securities but in fact contained a lot of nonperforming home loans and were actually junk.  When the homes securing these mortgages began going into foreclosure, the ABS became almost worthless, and the real estate market collapsed.

Mock defaulted on her loan and National Collegiate Student Loan Trust (NCSL) sued her along with Kary Mock, who cosigned the loan. NCSL claimed the Mocks owed $37,086,54, together with accrued interest of $5,645.37 for a total debt of $42,731,91.

The Mocks fought the suit in court, acting as their own lawyers. They argued that the interest rate was usurious, the loan was predatory, and NCSL had not provided proper documentation to support its claim.

The trial court ruled for NCSL, entering a judgment of $37,086.54; and the Mocks appealed.

Justice Harvey Brown, writing for the Texas Court of Appeals (First Circuit) rejected the Mocks' usury argument and their argument that the loan was predatory on its face. But Judge Brown reduced the amount of the judgment to $24,408.72 on evidentiary grounds, ruling that NCSL had not produced documentary evidence to support a larger amount.

Why is this Texas court opinion significant? Three reasons:

1) The case shines a light on the shady private student-loan industry. As we see from the Mock case, banks and financial institutions are marketing private student loans all across the United States, charging high interest rates--far higher than students pay on their federal loans. These loans are then bundled into pools (sometimes called (SLABS) and sold to investors.

2) Private student loans are as difficult to discharge in bankruptcy as federal student loans, which makes them especially attractive to investors.  A lot of fat cats are happy to buy SLABS packed with student loans bearing high interest rates, secure in the knowledge that these loans are almost impossible to discharge in the bankruptcy courts.

3) People taking out private student loans are making bad decisions. We don't know Casondra Mock's circumstances, but surely she made a bad decision when she took out a 20-year loan at 14 percent interest to finance her studies at the University of Houston at Clear Lake. She could have taken out a federal student loan with an interest rate half the rate charged by that Rhode Island bank.

Perhaps Casondra had already maxed out her federal student loans and needed more money to pursue her studies. But even if that were the case, surely there was a better way to address her financial needs than taking out a 20-year loan at 14 percent interest.

Acting at the behest of the big banks, Congress put private student loans under the "undue hardship" standard in the 2005 Bankruptcy Reform Act. Some reform!  Congress should repeal the "undue hardship" provision for both federal and private student loans as numerous policy experts have urged. And I'm sure Congress will correct its mistake someday--someday when pigs fly and the lions lie down with the lambs.

Someday, Congress will repeal the "undue hardship" clause in the Bankruptcy Code.

References

Mock v. National Collegiate Student Loan Trust, No. 01-17-00216-CV (Tex. Ct. App. July 10, 2018).

Student loan rates are going up--compounding misery for suffering college borrowers

James Carville, who was once President Bill Clinton's political strategist, famously remarked: "It's the economy, stupid!"

But Carville's one-liner needs updating. For student-loan debtors, "It's the interest, stupid!"

And student-loan interest rates are going up. For undergraduate student loans, the rate has risen to 5.05 percent, a 13 percent increase over current rates.

For graduate students, the rate rose to 6.60 percent, up from the last year's rate of 6.0 percent.

And rates for Parent PLUS loans are going up as well. As of July 1, the interest rate on Parent PLUS loans is 7.6 percent.

A Forbes article suggests the increase is no big deal. An undergraduate who takes out $10,000 in federal loans this year will only pay $349 more over ten years than under last year's interest rate. That's less than three bucks a month.

But let's think again. Interest rates on student loans are pretty damn high; why should they go higher? Students taking out federal loans to finance their college education pay a higher interest rate than they would for a car loan or even a house loan. And remember, the current interest rate on a 10-year government bond is only 2.85 percent. So how does the federal government get away with loaning money to students' parents at an interest rate of 7.6 percent?

Here's the real problem with interest rates on student loans: the interest compounds on outstanding loans until the loans are paid off. For some student debtors, interest on their student loans compounds while they are in school, which means they will owe more money than they borrowed by the time they graduate.

Even more concerning, millions of borrowers don't find good jobs after they graduate and are unable to immediately start making their monthly loan payments. This forces them to apply for economic hardship deferments, which are notoriously easy to get. But borrowers whose loans stay in deferment for two, three, four years or more will see their loan balances go up markedly.

And the story is the same for people who enroll in 20- or 25-year income-contingent repayment plans (ICRPs). Almost all these folks are making monthly payments so low they are not paying down accrued interest. Consequentially, their loans are negatively amortizing, which means ICRP participants are seeing their loan balances get larger with each passing month, even though they are making regular monthly payments.

Remember Mark Meru, the dentist who borrowed $600,000 to go to dentistry school and now owes a million dollars? He's in an income-based repayment plan that set his monthly payment at less than $1,600.   But interest is accruing at the rate of almost $4,000 a month. By the time he finishes his 25-year repayment plan, Dr. Meru will owe $2 million!

Albert Einstein observed that compound interest is the eighth wonder of the world. People who understand that earn it; and people who don't understand, pay it.

Apparently, millions of college-educated Americans don't understand compound interest. Otherwise, they never would have allowed themselves to get into debt so deep due to student loans that they will never pay off.

"It's the interest, knuckleheads!"

References

Zack Friedman. Student Loan Rates Will Rise 13% This Summer. Forbes.com, May 22, 2018.

Josh Mitchell. Mike Meru Has $1 Million in Student Loans. How did That Happen? Wall Street Journal, May 25, 2018.

Michelle Singletary gives good financial advice to young people about student loans, and here are my two cents (think La Brea tar pits)

Michelle Singletary, a syndicated columnist for the Washington Post, gives good advice  to young people about managing debt--including student loans. She published a very good article awhile back that contained two good pieces of advice. I will summarize her suggestions and add my own two cents.

First, Singletary challenges the conventional wisdom that young people should begin saving for retirement as early as possible--while still in their 20s.  "Millennials' money is often too tight," she counseled, "and for the many who have student loans, they may be best served spending the first years aggressively paying off this debt."

I agree completely. It makes no sense for young people to put money in IRAs or other retirement accounts if they aren't managing their student loans. After all, if they accumulate student-loan debt that becomes so large they can't make their monthly payments, they'll wind up in 25-year income-based repayment plans, which may prevent them from ever retiring.  It is absolutely critical for millennials to get their student loans paid off as quickly as possible.  For young people, there will be plenty of time later to save for retirement after they pay off their student loans.

Singletary also signaled her disagreement with commentators who lament the high percentage of young adults who live with their parents. It is true that more people in their 20s are living with Mom and Pop; 28 percent, according to Singletary, up from just 19 percent in 2016.

But that may not be a bad thing. If a young person can economize by living with parents, why not do so? That leaves more money to save for a down payment on a house or for paying student loans off early.

Now here are my two cents.

When taking out college loans, students should keep in mind the possibility that they won't find a good job after graduating. If their student loan debt is modest, they can probably make their monthly payments even if they are in a low paying job. But if they borrowed a lot of money and can't make the initial monthly payments, they will be forced to apply for an economic hardship deferment, which are very easy to get.

Those deferments excuse borrowers from making monthly loan payments, but compound interest accrues on the principal. Borrowers who put student loans in deferment for three years will find their loan balances will have grown substantially.

Then--if they can't make regular payments on the larger balance, student borrowers will be pushed into 20- or 25-year income-based repayment plans. In my view, that is a disastrous outcome for young people who took out student loans to improve the quality of their lives, not fall into a lifetime of indebtedness.

And here is some more of my two cents. Never take out private student loans from Wells Fargo, Sallie Mae or any of the other blood suckers who offer private student loans. Those loans are just as hard to discharge in bankruptcy as federal student loans.  And when I say never take out private student loans, I mean never.

Finally, to reiterate advice I have given tirelessly for many years, don't ask your parents to take out a Parent PLUS loan to finance your college studies; and don't ask them to co-sign any of your student loans. If you love Mama and Daddy, don't suck them into a veritable La Brea tar pit of perpetual student-loan indebtedness, especially if you are already in the tar pit yourself.

La Brea Tar Pits

References

Michelle Singletary. Millennials get plenty of financial advice-but most of it is wrong. Herald-Tribune, May 22, 2018.